Oram: Decision-making in a rapidly changing world

Our understanding of true value is greater than in the days of "Think Big", but government and business still struggle to achieve it faced with the complexity of the economic and environmental decisions that need to be made, and the speed of innovation, writes Rod Oram.

Two new projects represent the massively consequential decisions our business and political leaders must make about the future of our economy and environment, decisions which every nation faces with escalating urgency.

They are the plans to build a $3 billion complex in Taranaki to produce electricity, hydrogen and urea; and the Government’s launch of its $100 million Green Investment Fund.

Decisions about which technology to choose, who invests, and when were hard enough in easier, simpler decades past. While many good investments paid off handsomely, the bad ones killed companies and burdened governments.

But now three new dynamics of technology make the decisions phenomenally more complex and far-reaching: the speed of innovation, the intense competition between technologies, and the imperative to use only clean technologies for the sake of the biosphere, our life-support system.

Here’s a question illustrating all three: Which US President was the first to have an electric car in the White House garage?

Obama? Clinton? Carter? Bush the elder?

No. President William Taft. He was the proud owner of a brand new 1912 Baker Electric. However, he didn’t enjoy driving cars so usually his wife Nellie was spotted behind the steering tiller (yes, tiller, not wheel) on the streets of Washington. Incidentally, my 98 year old father-in-law remembers an old lady down the street in his Chicago suburb who was still driving the same model of EV in the 1930s.

But by 1912 electric cars were already relics, out-competed by petrol ones. Baker, founded in 1899, folded in 1914. Yet GM’s latest news is about plant closures and redeployment of people and capital to fast forward electric cars, thanks to the recent exponential growth of that technology and climate realities.

An advertisement for an early Baker Electric Car:  by 1912 such EVs were out-dated technology.

Technology is changing ever faster because we increasingly combine existing technologies to create new ones. British writer Matt Ridley explains this by describing the computer mouse in his TED talk “When ideas have sex.”

In comparison to the mouse, he notes, a hand tool of identical shape made and used by Stone Age people remained unchanged for 30,000 generations, some one million years.

Another example: On a snowy night in Paris in December 2008, two young Americans were frustrated they couldn’t get a taxi. They went home to San Francisco and established a company in March 2009 to make a smartphone app.

On July 5, 2010, the app put the first rider in touch with a limousine for a ride across the city. On December 30, 2015, the app, then running in more than 100 cities around the world, connected its 1 billionth passenger. On June 10 this year it hit 10b when 173 trips and deliveries simultaneously started at 10:12pm GMT in 21 countries across five continents.

The company has also been busy extended its technology to self-driving cars. By last December Uber’s test vehicles had clocked up 2 m miles. Yet Uber didn’t invent cars, smartphones, apps, mobile phone networks or much of the technology that runs them.

Meeting the existential challenge

We Kiwis are enthusiastic early adopters of all kinds of technology; and we’re very good at adapting technologies to meet our slightly different needs and our much smaller scale of businesses and country.

Air New Zealand’s technical and commercial capabilities, for example, make it more efficient, profitable, versatile and better liked by its customers than much larger airlines flying the same types of aircraft.

However, we are one-eyed. To a great extent we believe we’ll always have enough discerning customers in the world for our food, tourism, lifestyle and other benefits of our natural capital. She’ll be right if we just make it all a bit cleaner, a bit greener, a bit better marketed.

But those crucial drivers of our well-being -- food, tourism, identity and environmental responsibility -- are changing far faster and more profoundly than we are ready for, as this column often explores.

We must meet the same existential challenge as every other nation on the planet: making sure everything we do works with nature -- the biosphere -- not against it. Reducing pollution to zero is essential but insufficient. Our ultimate goal is to use natural resources, energy resources, technical resources (human-made materials) in ways that help the biosphere regenerate. Then it will support an even larger human population well and sustainably.

The Circular Economy is one of the crucial concepts for such a reinvention of all we do, as this column described in March.

While those are the ultimate goals humankind has to achieve over the next few decades because time is running out fast, here in New Zealand we need to make right now some very astute decisions about technologies and investments that will help us get there.

Crucially over the next few years we need to get even more competent and confident about deploying our skills and capital, and about attracting other people’s resources from overseas. Our tasks are too big for us alone.

Here are some of the key tests we need to apply to big decisions, and small ones too since they aggregate up across society into big impacts. Is the project:

- Working with nature, not against it?

- Using systems thinking, what impact, positive or negative, will it have on adjacent activities?

- Delivering co-benefits? (For example a bio digester might turn food waste into organic materials for other products while generating bio gas to generate electricity and to heat a nearby glasshouse to grow more food);

- Is it replicable if we need lots of them dotted around the country, or scalable if we need a few big ones?

- Is it a transition technology that will help shift the system, which is valuable, or just a slightly less polluting technology, which isn’t?

- If its technology or economics are quickly stranded by new competitors can the asset be repurposed in whole or part for some other use? (For more on stranded assets, check out the Smith School of Enterprise and the Environment at Oxford University and the Task Force on Climate-related Disclosures.)

- Is it affordable?

The last questions involves a very difficult piece of analysis. Conventional methods will weigh up the investment and the return, then apply a discount rate to judge its value over time.

Counting the intangible

But such analysis rarely includes wider factors such as very genuine but intangible benefits. For example, when over seven years we turned our 75-year old family home into a net zero energy house (it generates more electricity than it uses), converted a Prius into a plug-in hybrid and bought an EV, we asked Mercury Energy to lend us a financial analyst to calculate our return on investment.

The return was OK on the EV and acceptable on the photovoltaics, but the work on the house and car conversion had paybacks times extending into a third decade. However, the house was far warmer, quieter, drier, better lit and more comfortable and the Prius gave us the early thrill of owning an partial-EV when full EVs were well beyond our budget. So we were very happy with our investments.

Beyond the above criteria, there are plenty of traditional ones too, such as: is there a market; will the technology work; can we build it; and can we run it?

Fund many, fail fast and back winners

To make matters even more complicated, different investors have differing objectives, appetite for rewards and tolerance of risk. The range of private sector investors is immense running from evangelists, venture capitalists, and private equity firms to institutional investors, corporates and small business, and on to communities and consumers.

The best example by far of a New Zealand evangelist is Stephen Tindall, founder and still major owner of The Warehouse. He was the first commercial investor in LanzaTech, which turns waste gases from industrial processes into synthetic fuels and raw materials for plastics (thereby turning pollution into products and closing resource loops in a circular economy way), and a very early investor in Rocket Lab. He funds many other pioneering start-ups through his main VC vehicle K1W1, with a fair few failures among the successes along the way.

An intense follower of new technology trends, he is particularly interested in ventures that have the potential to achieve big breakthroughs in sustainability. His investment in LanzaTech has connected him with a wide range of VCs with similar interests around the world. Noting, for example, the rapid build-up in orders for hydrogen-powered buses and trucks Hyundai and Chinese manufacturers are enjoying, Tindall’s keeping a sharp eye out for opportunity for such vehicles and their supporting infrastructure here.  

“I’m watching everything very closely. If anything’s interesting, I’ll have a crack at it and then follow the money.” If the venture is succeeding, he will contribute to subsequent funding rounds. With Rocket Lab, for example, his large stake for a small sum in the company’s early days is turning into a highly valuable, though shrinking, stake in the fast growing business.

Conversely if a company fails to live up to its potential, he cuts his losses early. “I’m only spending my own money so it’s my problem and nobody else’s if it doesn’t work.”

In many ways the evangelists are the luckiest investors of all. They can pursue their passions unencumbered by many of the processes necessary in big, more formal and complicated organisations across that investment spectrum. Still, there are plenty of lessons they can all share with each other in this brave new world of radical, fast technology change in pursuit of deep sustainability.

The range of public sector investors is diverse too, as Mariana Mazzucato, the director of the Institute for Innovation and Public Purpose at University College London, proved in her 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths.

The book, widely praised by such publications as The Financial Times and Wall Street Journal, concluded the US’s economic success is the result of state and public funding of innovation and technology, a dynamic that applies to every other economy too, to varying degrees.

While we’re familiar with many US breakthrough technologies such as the internet and GPS which were created by defence spending, lesser known examples include the US National Science Foundation’s funding of the algorithm that helped create Google’s search engine.

It’s far harder, though, for public sector investors to pursue the private sector evangelist’s strategy to fund many, fail fast and back winners. Rightly their “shareholders”, the taxpayers, have far less appetite for risk.

Lessons from "Think Big"

However, public sector investors can do plenty of things the private sector can’t. Some are obvious such as ensuring laws, policies and government agencies foster progress. By far the most important for us for decades to come will be the Zero Carbon Bill next year, which will give us a roadmap to a sustainable economy, as I described in this recent column.

Similarly, there are cases where a government can take a far longer view than can corporates and their shareholders, as Mazzucato proved.

Thus, public sector investors are diverse, though less so than those in the private sector. Parliament, government ministries, Callaghan Innovation, the Crown Research Institutes, universities, the NZ Superannuation Fund, the Primary Growth Partnership, the Provincial Growth Fund, the Marsden Fund, the new Green Investment Fund and many other agencies all play vital and differing roles.

However, as the Productivity Commission argued in detail in its August report on our transition to a low emissions economy, the entire innovation ecosystem in the country, public and private sector, needs to massively realign itself to the formidable challenge of achieving a net zero carbon economy by 2050.

As awareness of this challenge grows and the pace of action and investments accelerates, is this Think Big all over again, some people are starting to ask. No it’s not, but there are lessons we can apply and others we can adapt from that extraordinary period in the 1970s and ‘80s.

Back then, we were trying to meet three enormous needs: diversify from agricultural exports, diversify from over-dependence on the UK market, and become self-sufficient for energy given the shortages and high price of imported fuel thanks to Opec.

As it happened, we had just discovered a huge gas resource in the Maui field off Taranaki’s shore but we had few uses for the gas. Thus were spawned plants to produce ammonia, urea fertilisers, methanol and synthetic fuels from it.

Meanwhile there were heavy investments in steel making, aluminium smelting (and the Manapouri hydro station to power it), the electrification of the main trunk line between Te Rapa and Palmerston North, expansion of the Marsden Point Refinery and, of course, the Clyde Dam, notorious for its $1.8b price tag because it was inadvertently built on a seismic fault line.

Private sector capital was only attracted to the steel and aluminium plants, leaving the Muldoon government to fund the rest. However, the energy rationale for many of the projects was based on fundamentally wrong analysis. The turmoil in the energy markets was not structural and long-term. It was caused by short-term political factors overseas. Once those were resolved, prices plunged and supply became abundant and predictable.

As a result the government lost a fortune on the gas-related plants, which was one of the reasons the country came close to bankruptcy in the early 1980s. However, the private sector picked up the assets for a song. Three decades later, they are still running profitably producing fertiliser and methanol. Likewise, the smelter, steel plant, refinery and Clyde dam make money for their shareholders.

As Jim McAloon writes in Judgements of all Kinds. Economic Policy-making in New Zealand, 1945-84 “…the biggest problem with Think Big was that major and complex decisions were taken far too quickly, at least sometimes on political rather than economic criteria, with significant issues decided on the run, and the parameters changing rapidly. Just as serious a flaw was the intention to do so much so quickly, rather than spreading the projects out over a longer period."

Both McAloon, and Barry Gustafson in His Way, a biography of Robert Muldoon, note that some decisions were taken in a rush to get some projects public in time for the 1981 election campaign. Treasury worries about the amount of overseas debt committed by the government to finance these projects were discounted. (Thank you to journalist Colin James for this research).

While Think Big is certainly a cautionary tale, we must be very careful how we apply it. We must not use it as an excuse for inaction, or for a narrow government response.

Back then, fickle oil prices were a transient problem. Today our problems with climate change and unsustainability in all its manifestations are very deeply systemic. They demand transformations globally at an utterly unprecedented speed of change, scale of change and complexity of change.

Back then government and business were poor at dealing with complexity and with working together. Today they are more capable at both, although they have much more still to learn.

Back then we saw utter commodity products as the answer to our economic development. Today our understanding of true value is greater, though we still struggle to achieve it.

So, we need deeper understanding, bigger ambitions, stronger skills…and a new slogan.

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